2 Basic Capitalization of a Renewable Energy Project Construction/Bridge/Term or Permanent Financing (including letter of credit facility) 50%-70% of project cost Debt facilities can be obtained separately or combined in a single agreement with one lender; Multiple facilities from different lenders can create difficult intercreditor issues Basic Capitalization of a Renewable Energy Project Permanent financing may include separate tranche of long-term fixed rate debt Institutional investors (life insurance companies, pension funds, etc.) 25%-50% of total capital structure Up to year maturity 2

3 Basic Capitalization of a Renewable Energy Project Tax Equity Investment 25%-35% of total capital structure Funding occurs after construction completed and just before project is placed in service for tax purposes Proceeds pay off all or some portion of construction or bridge financing Basic Capitalization of a Renewable Energy Project Cash/Sponsor Equity 5%-15% of total capital structure Sponsor has ability to retain long-term control of project after return on tax equity investment is realized 3

6 Construction Financing Construction loan disbursement procedures Lien waivers from contractors Construction expenses and schedule are in accordance with budget; Lender wants assurance that project will reach commercial operation and begin generating revenues Title insurance endorsements Certificates from independent engineer and other project consultants Confirmation of reps and warranties, no default, etc. Remaining funds plus equity sufficient to pay all remaining project costs Construction Financing At maturity (scheduled completion date), construction loan is required to be repaid in one of two ways: Third party takeout requirement commitment for permanent financing or sale of project Conversion to term loan requires commercial operation, payment of construction costs, generation of project revenues 6

7 Permanent Debt Financing Debt sizing and amortization based on financial model Model shows project revenues (primarily PPA payments) and project expenses; debt is sized into the model at a level that will produce sufficient debt service coverage over the term of the financing Structure and terms generally similar to construction loan, with shift in focus from construction to operating integrity of project: Mortgage and security interest in project assets Pledge of ownership of project company Reserve funds Covenants Tax Equity Investment Monetizing of tax benefits Project developers and sponsors often cannot effectively utilize tax benefits Tax benefits accrue to the owner of the project Owner is normally a limited liability company or other pass-through entity for tax purposes, so tax benefits flow through to equity owners of project company Such owners need to have taxable income sufficient to produce appetite for tax benefits 7

9 Tax Equity Investment Investment Tax Credit (ITC) One-time credit equal to 30% of the cost of qualified energy property (10% for certain technologies) Credit is claimed in year project is placed in service No requirement to sell energy output Subject to recapture Tax Equity Investment Production Tax Credit (PTC) Credit equals 2.3 cents per kwh of electricity produced by the taxpayer from qualified energy sources (1.1 cents per kwh for certain technologies) Electricity must be sold to unrelated person during taxable year PTC available for first 10 years from original placed in service date Not subject to recapture PTCs available for used property 9

10 Tax Equity Investment Accelerated depreciation (MACRS) Provides for front loading of cost recovery deductions Generally, MACRS allows renewable energy property to be depreciated over 5 years Bonus depreciation Special depreciation allowance for new property placed in service after 2007 and before 2014 For qualifying property (including renewable energy property): 50% of cost Remaining cost is recovered under MACRS Not more depreciation, just more front-loading Tax Equity Investment Financing options converting tax benefits into financing Structuring options are often complex Tax incentives generally follow ownership Developer/sponsor wants to remain as long-term owner Tax equity investor views itself as a lender Extent to which developer is able to utilize tax incentives will vary 10

14 Debt Structure and Terms Sample payment priority waterfall provision all project revenues applied to the following obligations in the following order: LC loans and unreimbursed LC drawings Funding of debt service reserve, maintenance reserve and other reserve accounts Transfer to distribution account for distribution to sponsor (subject to distribution conditions) Debt Structure and Terms Covenants Debt service coverage ratio Usually not a maintenance covenant Cash trap restriction on dividends up to sponsor Modification of project agreements Materiality Preparation and modification of annual operating budget Standard affirmative and negative covenants 14

15 Debt Structure and Terms Sample distribution conditions: [1.20x] historical debt service coverage ratio measured for preceding 12-month period [1.20x] projected debt service coverage ratio based on approved financial projections for succeeding 12- month period Prior funding of all reserves (to the extent then required and not otherwise covered by a letter of credit or parent guaranty) Absence of outstanding LC loans or unreimbursed drawings under letters of credit No Default or Event of Default Contractor/Vendor Financing Project contractor can self-finance its own contract by deferring contract payments Equipment supplier can provide financing through extended payment terms (intentionally or not) Consider what terms may apply to these forms of financing: Does the project contract include a security agreement? Granting language; description of collateral; signed by the debtor Authentication of record can be electronic signature Security agreement can be a paragraph in sales contract Battle of the forms may be an issue whether project owner has agreed to the terms and conditions that include the security agreement 15

16 Contractor/Vendor Financing UCC filing Filed electronically; no signature required Authorization to file in signed security agreement Description of collateral limited to goods sold or include other debtor assets? Where to file? If the collateral is inventory or equipment in the hands of the debtor, then at the Secretary of State or other central filing office in the state where the debtor is organized (not necessarily where debtor s offices or operations are located - if debtor is a Delaware company, file in Delaware) Contractor/Vendor Financing UCC filing Where to file? If collateral is installed at the project, might be fixtures which requires a special filing, including name of the record owner of the real estate where the collateral is located and a legal description of the real estate, filed with the real estate records in the registry of deeds for the county where the real estate is located (like a mortgage) Note: a UCC financing statement is not a security agreement both are needed to obtain a perfected security interest 16

17 Contractor/Vendor Financing Purchase-money priority Depends on the nature of the transaction A purchase-money obligation is an obligation incurred as all or part of the price of the collateral or for value given to enable the debtor to acquire rights in or use of the collateral is the value is in fact so used No special requirements for collateral other than inventory For inventory, must notify other secured creditors Are the goods equipment or inventory in the hands of the debtor/buyer? Contractor/Vendor Financing Purchase-money priority Conduct UCC lien search to determine whether buyer has other secured creditors with security interest in debtor s inventory 17

18 Contractor/Vendor Financing Third party agreements Owner/operator of warehouse where goods are stored Owner of project site Terms: Acknowledgement of vendor s security interest Waiver of any interest in collateral Grant of access to site to seize and dispose of collateral Contractor/Vendor Financing Security provides significant benefits to creditor and imposes restrictions on debtor: Priority as against other creditors Limitations on sale or other disposition of collateral Rights in bankruptcy Remedies Other forms of payment security Letter of credit Affiliate guaranty Cash on delivery 18

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